30 SECOND GUIDE: COCOS

The Daily Mail City team explains these bonds which can turn to equity given the right circumstances

My favourite milky drink

Not quite. ‘Coco’ is short for
‘contingent convertible’ – a
special type of company bond, a
form of IOU.

Remember that a
bond, which is a type of debt, is
issued by a company to raise
money.

By buying a bond you are
lending money. When it ‘matures’
you receive the cash back. In the
meantime you get interest,
called a ‘coupon’.

Barclays: Issued cocos this week

What’s special?

Cocos can turn from a bond into
equity, but only in special
circumstances – hence they are
‘contingent’ on a specific event.

This trigger for the conversion
can differ depending on the
terms of the coco. One example
would be if a company’s share
price went above a certain level,
the bondholder would
automatically be transferred to
become a shareholder.

Why?

When the bond converts, the
company no longer has the
money as debt, but as capital –
this means it can spend it more
freely.

For banks, for whom cocos
were developed, this means they
boost their ‘capital ratios’.

By
law they have to hold a certain
amount of capital compared to
the amount of money they have
deposited with them.

Such as?

Barclays this week issued cocos,
and pulled in £7.9billion. It’s the first
bank to use them since more
stringent ‘capital ratio’
requirements were brought in
under new rules called Basel III.